The official blog of Illinois Issues magazine,
published by the Center for State Policy and Leadership
at the University of Illinois Springfield

Wednesday, November 16, 2011

Several tax breaks are on the table

By Jamey Dunn

Illinois lawmakers took a look at ways to change tax policy in the state as part of a package to keep companies that have threatened to leave.

Threats to leave the state from the CME group, which owns the Chicago Mercantile Exchange and the Chicago Board of Trade, spurred work on a package that could offer tax relief to CME, other businesses and Illinois families.

Lawmakers are considering a number of tax tweaks meant to spur economic growth, including:

Changing the way the state calculates the tax bill for CME and other exchanges in the state by reducing the percentage of sales that are taxable. Currently, CME’s income tax is calculated based on all of its sales even though online trading leads to many of the sales going to customers outside Illinois The Illinois Department of Revenue estimates that this change would cost the state about $85 million in revenue.

Extending the research and development tax credit. The Department of Revenue estimates that this would cost about $40 million a year.

Increasing the Earned Income Tax Credit for working families from 5 percent of the federal credit to 15 percent over two years. According to the Department of Revenue, the increase would cost about $112 million annually.The department estimates 900,000 households or 2.5 million residents would benefit from the credit.

Reinstating the Net Operating Loss Credit that allows businesses to write off losses. It was temporarily removed under the tax increase passed in January. The Department of Revenue estimates that this would eat up about $275 million each year.

Reducing to $100 the fees companies must pay to become corporations, which can range from $500 to $750. The change would cost about $12 million in state and local revenue.

The plan would be paid for in part by decoupling from a federal tax incentive meant to encourage businesses to buy equipment. The plan allows businesses to deduct more of the costs of such purchases upfront, instead of spreading it out over several years. Illinois links its practices to the federal tax code, but if it were to “decouple” from the feds on this policy, the Department of Revenue estimates that it would mean an additional $571 million in revenue for Fiscal Year 2012, and another $354 million next fiscal year. These estimates are based on applying a decoupling retroactively back to January.

Many who testified today at committee hearing on the package said that such a retroactive action would be unfair to businesses that bought equipment under the current rules. John Stevens—owner of Stevens Implement Company, a John Deere dealership in Petersburg— said his sales have gone up 10 percent in the last year, and the increase has allowed him to hire more staff. The tax incentive, known as bonus depreciation, is “one of the major reasons we have seen our sales increase in 2011.”

Stevens said the change would pull the rug out from under companies that have made large purchases in “good faith” under the bonus depreciation plan. “Large investments like this must be planned well in advance to engineer, schedule and finance while considering all tax implications.”

Creating a package that can pass will be a difficult task. Legislators on both sides of the aisle support the idea of making some tax changes to spur the economy, but opinions differ on what is needed. Senate President John Cullerton introduced a plan that only targets exchanges, such as CME. Many Republicans did not support the measure, saying it was unfair to help out one large business when many small companies are struggling. Gov. Pat Quinn has backed an increase to the Earned Income Tax Credit since lawmakers were weighing tax increase options shortly after he took office. However, all of these tax breaks will suck up precious revenue in a time when the state is making cuts to education, human services and politically popular programs. The difficulty in weighing all these considerations likely played a part in the issue being pushed out of the regular veto session and into some specially scheduled session time later this month. Another hearing is scheduled on Friday, and the full House is scheduled to return to Springfield to take up a plan on November 29.

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The bureau follows state government from the Capitol Press Room and writes articles for Illinois Issues magazine, published by the Center for State Policy and Leadership at the University of Illinois at Springfield.
Contact: illinois.issues@gmail.com